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Managers Guide To Finance and Accounting
Managers Guide To Finance and Accounting
Guide to Finance
& Accounting
Contents As a manager, every decision you make has financial implications. An intuitive
understanding of finance and accounting can take you from simply performing your job
3 Finance vs. Accounting: duties to understanding the greater impact your actions have on your organization’s
financial health. It can benefit you no matter your industry, whether it’s:
What’s the Difference?
Engineering: Engineering is a project-based field, in which attention to
6 Financial Skills All Managers detail is highly valued. Understanding the costs and benefits of each
component of a project can make you a more effective manager.
Should Have
Financial Statement Analysis.������������� 7 Marketing: Whether you’re projecting future traffic flow to your company’s
website or tracking the number of new customers driven by your latest
Financial Fluency�����������������������������21
blog post, you’re using financial skills and concepts to excel as a marketer.
ROI Calculation �������������������������������23
Budgeting����������������������������������������26 Sales: As a sales manager, knowing how to read a financial statement and
use financial terminology can help you understand the rationale behind
Financial Performance your company’s goals.
Measurement����������������������������������28
Human Resources: If you’re an HR manager, a familiarity with finance and
31 Taking the Next Step in Your accounting can enable you to facilitate meaningful cross-departmental
conversations and advocate for your budget to hire or train employees.
Financial Education
Healthcare: A foundational knowledge of financial principles and
concepts can inform decisions to purchase emerging technologies or
fund new research that equips your organization to better support its
patients.
These are just a handful of ways financial literacy can pay off in your profession.
Throughout this guide, you’ll expand your knowledge of finance and accounting
by learning about the differences between the two disciplines, the financial skills
all managers need, and how taking an online course can help you achieve your
educational goals and accelerate your career.
Finance vs. Accounting:
What’s the Difference?
Finance and accounting are terms often used interchangeably. While both are related
to the administration and management of an organization’s assets, each has a different
scope and focus. When it comes to evaluating the financial health of your company or
department and making strategic financial decisions, it’s important to have a working
knowledge of both disciplines.
Here’s a look at the key differences between finance and accounting.
1. The Scope and Focus The accounting equation must always balance—the assets
on the left should equal the claims against those assets on
Finance and accounting operate on different levels of the the other side. It’s a fundamental means for determining
asset management spectrum. Whereas accounting provides whether a company’s financial records accurately reflect the
a snapshot of an organization’s financial situation using past transactions carried out over a period.
and present transactional data, finance is inherently forward- When assessing performance through the lens of finance,
looking—all value comes from the future. cash is king. Unlike accounting’s reliance on transactional
In accounting, insight into a firm’s financial situation is data, finance looks at how effectively an organization
gained through what’s known as the accounting equation, generates and uses cash through the use of several
which is typically displayed as: measurements.
Free cash flow is arguably the most important one, which
examines how much money a company has to distribute to
ASSETS = LIABILITIES + OWNERS’ EQUITY investors, or reinvest, after all expenses have been covered.
It’s a strong indicator of profitability and can be used to make
present-day investment decisions based on an expectation of
The equation consists of three components:
future payoff.
• Assets: Anything a company owns with quantifiable value
• Liabilities: Money a company owes to a debtor, such as
outstanding payroll expenses, debt payments, rent and
utilities, bonds payable, and taxes
• Owners’ equity: The net worth of a company, or the
amount that would be left if all assets were sold and all
liabilities paid; this money belongs to shareholders, who
may be private owners or public investors
Both finance and accounting are useful for assessing a company’s position and performance. By understanding the
underlying principles of each discipline and how they contrast, you can develop greater financial intuition and make
better business decisions.
Next, you’ll learn about the essential financial skills every manager should have.
The Balance Sheet When a balance sheet is reviewed internally, it’s designed to
give insight into whether a company is succeeding or failing.
A balance sheet is a financial document designed to Based on this information, policies and approaches can be
communicate exactly how much a company or organization is shifted: doubling down on successes, correcting failures, and
worth—its “book value.” It achieves this by listing and tallying pivoting toward new opportunities.
all of a company’s assets, liabilities, and owners’ equity as of a When a balance sheet is reviewed externally, it’s designed
particular reporting date. to give insight into the resources available to a business and
Typically, a balance sheet is prepared and distributed on a how they were financed. Based on this information, potential
quarterly or monthly basis, depending on the frequency of investors can decide whether it would be wise to invest.
reporting as determined by law or company policy. External auditors might also use a balance sheet to ensure a
company is complying with any reporting laws it’s subject to.
The Purpose of a Balance Sheet It’s important to remember that a balance sheet communicates
information as of a specific date. By its very nature, a balance
Balance sheets serve two very different purposes, depending
sheet is always based on past data. While investors and
on the audience reviewing them.
stakeholders may use a balance sheet to predict future
performance, past performance is no guarantee of future
results.
• Bonds payable
Assets
BUSINESS INSIGHT NON-CURRENT ASSETS JUNE 30, 2020 JUNE 30, 2019
BRANDS $255 $302
A Balance Sheet Example CUSTOMER RELATIONS 71 84
LEASEHOLD RIGHTS 537 585
By looking at this balance sheet, you can CAPITALIZED EXPENDITURES 631 -
extract vital information about the health GOODWILL 64 64
BUILDINGS AND LAND 805 804
of the company being reported on.
EQUIPMENT, TOOLS, FIXTURES AND FITTINGS 18,326 16,589
LONG-TERM RECEIVABLES 628 608
This balance sheet tells you: DEFERRED TAX RECEIVABLES 1,624 1,234
TOTAL NON-CURRENT ASSETS 22,941 20,270
1 The reporting period ends on June
30, 2020, and compares against CURRENT ASSETS JUNE 30, 2020 JUNE 30, 2019
a similar reporting period from the INVENTORY 15,213 13,819
earnings during the reporting period, CURRENT LIABILITIES JUNE 30, 2020 JUNE 30, 2019
slightly more than the same period a ACCOUNTS PAYABLE 4,234 4,307
TAX LIABILITIES - 1,851
year prior.
OTHER LIABILITIES 2,765 2,428
ACCRUED EXPENSES AND OTHER DEFERRED REVENUE 7,011 6,171
TOTAL LIABILITIES $16,338 $16,084
4 By the end of the year, the company saw a net income OTHER INCOME AND EXPENSES AMOUNT
of $483.23 million. INCOME TAX EXPENSE 257,642
NET INCOME $ 483,232
AMOUNT
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR $ 10,764
A Cash Flow Statement Example
OPERATING ACTIVITIES: AMOUNT
Here’s an example of a cash flow NET INCOME 37,037
statement for the year that ended on ADJUSTMENTS TO RECONCILE NET INCOME TO CASH GENERATED BY
March 30, 2020. OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 6,757
DEFERRED INCOME TAX EXPENSE 1,141
This cash flow statement tells you: OTHER 2,253
CHANGES IN OPERATING ASSETS AND LIABILITIES:
1 The company started the year with
ACCOUNTS RECEIVABLE, NET (2,172)
approximately $10.75 billion in INVENTORIES (973)
cash and equivalents. VENTOR NON-TRADE RECEIVABLES 223
OTHER CURRENT AND NON-CURRENT ASSETS 1,080
2 It brought in $53.66 billion through ACCOUNTS PAYABLE 2,340
its regular operating activities. DEFERRED REVENUE 1,459
OTHER CURRENT AND NON-CURRENT LIABILITIES 4,521
3 It spent approximately $33.77 CASH GENERATED BY OPERATING ACTIVITIES 53,666
billion in investment activities.
INVESTING ACTIVITIES: AMOUNT
4 In addition to investment activities, PURCHASES OF MARKETABLE SECURITIES (148,489)
it spent a further $16.38 billion in PROCEEDS FROM MATURITIES OF MARKETABLE SECURITIES 20,317
PROCEEDS FROM SALES OF MARKETABLE SECURITIES 104,130
financing activities, making for a
PAYMENTS MADE IN CONNECTION WITH BUSINESS ACQUISITIONS, (496)
total cash outflow of $50.15 billion. NET OF CASH ACQUIRED
PAYMENTS MADE FOR ACQUISITION OF PROPERTY, PLANT, AND (8,195)
5 The company ended the year with a EQUIPMENT
positive cash flow of $3.51 billion, PAYMENTS FOR ACQUISITION OF INTANGIBLE ASSETS (911)
OTHER (160)
and total cash of $14.26 billion.
CASH USED IN INVESTING ACTIVITIES (33,774)
AMOUNT
CASH AND CASH EQUIVALENTS BALANCE AT THE END OF THE YEAR
Financial Skills All Managers Should Have INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 18
3,513
CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,259
The Annual Report The Contents of an Annual Report
An annual report is a publication that public corporations An annual report is often split into two halves. The first section
are required to publish every year by law. It describes a typically includes a narrative of the company’s performance
company’s operations and financial conditions so that over the previous year, along with forward-looking statements.
current and potential shareholders can make informed The second section strips the story out and includes financial
investment decisions. documents and statements. Here’s a more detailed list of the
items an annual report contains:
Unlike other financial data, annual reports include editorial
and storytelling, and they’re typically professionally designed • Letters to shareholders: These letters typically include
and used as marketing collateral. Annual reports are sent one from the CEO or president and other key figures, such
to a company’s shareholders before its annual shareholder as the CFO.
meeting and the election of its board of directors, and they’re
• Management’s discussion and analysis (MD&A): This
often accessible to the public via the company’s website. is a detailed analysis of the company’s performance, as
conducted by its executives.
The Purpose of an Annual Report
• Audited financial statements: These are financial
An annual report can help you learn more about what type of documents that detail the company’s financial performance,
company you work for and how it operates, including: such as balance sheets, cash flow statements, income
statements, and equity statements.
• Whether it’s able to pay debts as they come due
• A summary of financial data: This refers to any notes
• Its profits and/or losses year over year or discussions pertinent to the financial statements listed
• If and how it’s grown over time above.
• What it requires to maintain or expand its business • Auditor’s report: This report describes whether the
company has complied with GAAP in preparing its
• Operational expenses compared to generated revenues financial statements.
All of these insights can help you be privy to conversations • Accounting policies: This is an overview of the policies the
surrounding your company’s future. company’s leadership team adhered to when preparing
the annual report and financial statements.
Reviewing and understanding these financial documents can provide you with valuable insights about your
organization, such as:
• Its debts and ability to repay them
• Profits and losses for a given quarter or year
• Whether profit has increased or decreased compared to similar past accounting periods
• The level of investment required to maintain or grow the business
• Operational expenses, especially compared to the revenue generated from those expenses
The value of these documents lies in the story they tell when reviewed together.
By learning how to calculate ROI for projects you’re interested in pursuing, you can self-evaluate them before they’re
shared with other decision-makers within your organization and ensure you’re making the best possible use of available
resources. Similarly, by understanding how to calculate ROI after a project is done, you can speak to the contributions
that you and your team have made toward shared company goals.
At its most basic level, a budget ensures a team or department “Business conditions change rapidly, and basing your current
has the resources needed to achieve its goals. For managers, budget on historical information can adversely impact budgets
the budget serves as a vital tool for: within other areas of an organization,” writes John Wong, HBS
Online’s senior associate director of Financial Planning and
• Communicating expectations and goals to stakeholders Analysis, in an article for the Business Insights blog.
• Mobilizing teams and departments around organizational 3. Work Toward Goals
objectives
Understanding your organization’s goals is vital to successful
• Assessing group and individual performance
budgeting. This knowledge can help you develop a clear
• Gaining insight into an organization’s financial health picture of how your team’s work fits into the company’s key
• Allocating resources strategically and appropriately objectives and advances its overarching mission.
If you want to reap the benefits of these techniques, here are For example, your firm may be planning an important
five budgeting tips you can employ to become a better manager. organizational change initiative, such as a redesign of its
website. As part of this process, your team will be responsible
1. Know Your Organization’s Budgeting Timeline and for writing web copy, creating videos, and designing graphics.
Procedures
With these requirements in mind, you can break your team’s
Familiarize yourself with your organization’s budgeting work down into specific deliverables and line items within
deadlines and procedures at the outset of the process. Your your budget, accounting for all the resources your employees
numbers may be reliant on financial targets set by your will need to produce the desired results and push the project
supervisor and other department heads. Knowing when through to completion.
specific deliverables are due will help ensure you effectively
manage your time and connect with stakeholders who can
inform your allocation decisions.
Budgeting is an essential management skill that can drive organizational success. With a clear understanding of
your firm’s processes and goals, a well-developed plan for evaluating performance, and a knowledge of financial
principles, you can make more informed decisions and ensure your team meets its targets.
5. Quick Ratio
7. Debt-to-Equity Ratio
The quick ratio, also known as an acid test ratio, is another
The debt-to-equity ratio is a solvency ratio that measures how
type of liquidity ratio that measures a business’s ability to
much a company finances itself using equity versus debt.
handle short-term obligations. The quick ratio uses only
This ratio provides insight into the solvency of the business by
highly liquid current assets in its numerator, such as cash,
reflecting the ability of shareholder equity to cover all debt in
marketable securities, and accounts receivables. The
the event of a business downturn.
assumption is that certain current assets, like inventory, are
not necessarily easy to turn into cash.
DEBT-TO-EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY
QUICK RATIO =
(CURRENT ASSETS - INVENTORY) / CURRENT LIABILITIES 8. Inventory Turnover
Inventory turnover is an efficiency ratio that measures how
many times per accounting period the company sold its
entire inventory. It gives insight into whether a company has
excessive inventory relative to its sales levels.
Return on assets, or ROA, is another profitability ratio similar In the next section, you’ll learn how taking an online
to ROE. It’s measured by dividing net profit by the company’s course could help you achieve your educational and
average assets. It’s an indicator of how well the company is professional goals.
managing its available resources and assets to net higher profits.
Course Information
Financial Accounting Leading with Finance
Faculty V.G. Narayanan Mihir Desai
What You’ll Learn • How to prepare a balance sheet, income statement, • A toolkit for making smart financial decisions and the
and cash flow statement confidence to communicate those decisions to key
• Processes for reading and analyzing financial stakeholders
statements to determine your company’s business • Financial analysis techniques and how capital markets work
performance and potential • Ways to create and assess value to evaluate and pitch
• Forecasting and valuation methods projects
Who Will Benefit • Current or aspiring managers who want to understand • Early- and mid-career professionals who want to understand
how their decisions impact their company’s bottom the financial landscape of their business and industry to
line and improve its profitability advance their career—particularly if they’re in a non-finance
• Recent graduates interested in learning the language role
of business • Aspiring finance professionals who want to learn fundamental
• Those considering an MBA who want to prepare for financial terms, concepts, and principles
the classroom with a course HBS offers to incoming • New leaders who want to equip themselves with the skills to
students create a budget, calculate ROI, and articulate the financial
implications of their decisions
How to Learn More Visit the Financial Accounting course page Visit the Leading with Finance course page
Both courses can equip you with skills that will prove invaluable in your role as a manager and throughout your career. You can also learn
more in Desai’s book, How Finance Works: The HBR Guide to Thinking Smart About the Numbers.
Developing financial literacy will enable you to make better business decisions, understand the financial implications of your actions,
and more effectively communicate and collaborate with others throughout your organization.
To learn more about what HBS Online
can do for you, visit online.hbs.edu.